Measuring Economic Policy Uncertainty
Scott R. Baker,Nicholas Bloom,Nicholas Bloom,Steven J. Davis,Steven J. Davis,Steven J. Davis +5 more
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The authors developed a new index of economic policy uncertainty (EPU), built on three components: the frequency of newspaper references to economic policy uncertainties, the number of federal tax code provisions set to expire, and the extent of forecaster disagreement over future inflation and government purchases.Abstract:
Many commentators argue that uncertainty about tax, spending, monetary and regulatory policy slowed the recovery from the 2007-2009 recession. To investigate this we develop a new index of economic policy uncertainty (EPU), built on three components: the frequency of newspaper references to economic policy uncertainty, the number of federal tax code provisions set to expire, and the extent of forecaster disagreement over future inflation and government purchases. This EPU index spikes near consequential presidential elections and major events such as the Gulf wars and the 9/11 attack. It also rises steeply from 2008 onward. We then evaluate our EPU index, first on a sample of 3,500 human audited news articles, and second against other measures of policy uncertainty, with these suggesting our EPU index is a good proxy for actual economic policy uncertainty. Drilling down into our index we find that the post-2008 increase was driven mainly by tax, spending and healthcare policy uncertainty. Finally, VAR estimates show that an innovation in policy uncertainty equal to the increase from 2006 to 2011 foreshadows declines of up to 2.3% in GDP and 2.3 million in employment.read more
Citations
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Fluctuations in Uncertainty
TL;DR: This article found that both macro and micro uncertainty appears to rise sharply in recessions and the types of exogenous shocks like wars, financial panics and oil price jumps that cause recessions appear to directly increase uncertainty, and uncertainty also appears to endogenously rise further during recessions.
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Disentangling the Channels of the 2007–09 Recession
James H. Stock,Mark W. Watson +1 more
TL;DR: This paper examined the macroeconomic dynamics of the 2007-09 recession in the United States and the subsequent slow recovery using a dynamic factor model with 200 variables and reached three main conclusions: although many of the events of 2007-2009 collapse were unprecedented, their net effect was to produce macro shocks that were larger versions of shocks previously experienced, to which the economy responded in a historically predictable way.
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Policy Uncertainty and Corporate Investment
Huseyin Gulen,Mihai Ion +1 more
TL;DR: In this article, a news-based index of policy uncertainty was used to find a negative relationship between firm-level capital investment and the aggregate level of uncertainty associated with future policy and regulatory outcomes.
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Investor sentiment aligned: : A powerful predictor of stock returns
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References
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Book
Investment Under Uncertainty
Avinash Dixit,Robert S. Pindyck +1 more
TL;DR: In this article, Dixit and Pindyck provide the first detailed exposition of a new theoretical approach to the capital investment decisions of firms, stressing the irreversibility of most investment decisions, and the ongoing uncertainty of the economic environment in which these decisions are made.
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The role of monetary policy
TL;DR: There is wide agreement about the major goals of economic policy: high employment, stable prices, and rapid growth as discussed by the authors.There is less agreement that these goals are mutually compatible or, among those who regard them as incompatible, about the terms at which they can and should be substituted for one another.
Journal ArticleDOI
Uncertainty about Government Policy and Stock Prices
TL;DR: This paper analyzed how changes in government policy affect stock prices and found that stock prices should fall at the announcements of policy changes, on average, if uncertainty about government policy is large, and also if the policy change is preceded by a short or shallow economic downturn.
Posted Content
The Impact of Uncertainty Shocks
Nicholas Bloom,Nicholas Bloom +1 more
TL;DR: In this paper, a model with a time varying second moment was proposed to simulate a macro uncertainty shock, which produces a rapid drop and rebound in aggregate output and employment, and showed a good match in both magnitude and timing.
Journal ArticleDOI
Political Uncertainty and Corporate Investment Cycles
Brandon Julio,Youngsuk Yook +1 more
TL;DR: In this paper, the authors investigate several potential explanations and find evidence supporting the hypothesis that political uncertainty leads firms to reduce investment expenditures until the electoral uncertainty is resolved, which is an important channel through which the political process affects real economic outcomes.